November 2016

I’d like to say I did this deal with “no money down,” but technically that would be a lie.

Because I spent exactly $1.00 on this property to acquire AND rehab the property.

That’s right. I purchased the property and am in the process of rehabbing it all using no money of my own.

And ultimately, this property is going to provide hundreds of dollars a month in cash flow and entirely pay for my newborn daughter’s college education.

The goal of this post is to explain, in detail, how I did it.

Ready?

But first, two-disclaimers.

Two Disclaimers

There are two dangers present every time I tell a detailed story of how I bought a property.

First, some people invariably think that I’m giving out some “formula” that must be followed. They’ll ask me questions like, “But what if I can’t find a fourplex?” Or they’ll say, “I don’t have a private lender like that.” Then, they shut off their brain because they don’t believe that they can follow this exact formula.

But here’s the deal: I’m not telling you a formula, a recipe, or a step-by-step list of tasks for you to complete. Every single deal is different! So don’t get hung up on trying to copy my steps exactly. The goal of this post is not to invite you to copy me — but to spark your own inspiration to go out and put together your own deal.

Second, people look at the price range that I buy in and say, “Prices are so much higher (or lower) in my area — so that doesn’t work for me.”

I believe this is just an excuse for people to be lazy. Because it does work in your area, but again, the formula might be different. I don’t care if the average cost of a house is $30,000 or $300,000 in your area. There are investors making money in your market. So don’t let the low cost of this property fool you into thinking this can’t be done in other price ranges.

Furthermore, as I’ll discuss, I found an INCREDIBLE deal on this property. I work my tail off to find leads (as I’ll explain), and this property is not worth what I paid for it. I got it on sale!

OK, now that we’ve got that out of the way, it’s time to dive into the story of how I acquired a fourplex for just $1. But before I can even tell you about the deal, I need to start at the beginning.

Finding the Property

For years, I used nothing but the MLS to find potential deals. In other words, I simply relied on my real estate agent to bring properties (usually bank repos) to my attention — and I would make an official offer to buy them.

However, over the past year, the MLS has becoming increasingly difficult to find good deals on (or maybe I’m just getting more picky!). Therefore, I needed to find a better way to bring in leads.

Enter: direct mail marketing.

Direct Mail

For those unfamiliar with direct mail, it’s simply the practice of sending out large volumes of mail to property owners asking to buy their properties. Of course, most of that mail is simply ignored, but a small percentage do actually call because they need to sell — which is the case with this fourplex. But I’m getting ahead of myself.

Direct mail marketing begins with the list of names and addresses you are going to mail to. While you could simply mail to every person in your target market, I wouldn’t advise it! Instead, you want to focus on people who might be most intent on selling their property to you. (For more on direct mail, don’t miss “The Ultimate Guide to Using Direct Mail Advertising to Grow Your Real Estate Business.” It’s even longer than this post!)

Related: The Power of Private Financing: 3 No Money Down Strategies That Actually Work

For this particular deal, I purchased my list from ListSource.com, probably the most popular list broker on the web. I chose the following criteria:

My Whole County
Total Assessed Value: $50,000-$200,000
Equity: 30% to 100%
Length of Residence: Greater than Four Years
Absentee Owner In-State & Out-of-State
Exclude Trust and Corporate-Owned
For me, the list came to 1,864 unique names, which I paid $326.20 to download — or roughly $.18 per name.

Quick Tip Lesson Learned: Once I opened up the list in Microsoft Excel, I realized I had wasted some money because well over half the properties were located in the city of Ocean Shores, Washington or Westport, Washington, and I don’t buy there. So, I should have excluded the zip codes for the cities that I do not buy in, which would have saved me some cash on the purchase.

So, in the end, I actually ended up with just over 600 names on my list.

I call these leads my “raw leads.” It means leads that I’ve put into my system but are not yet “activated.” The owner has not yet showed any interest in buying them. Raw leads are important, but next it’s time to get the owners to talk with me, turning the raw leads into hot leads.

To do that, it was time to mail the letters to the names on the list. I decided to send to 300 to start with, and the other 300 I would mail to a few weeks later — so to break up the number of phone calls I would receive.

So, it was time to write 300 letters. While I could have done this by hand, that just didn’t sound fun. So instead, I created my own handwritten font online and used that to print out “handwritten” letters and envelopes. For a step-by-step guide on how I did that, be sure to read “How to Create Your Own Handwritten Font For Free (For Direct Mail Marketing).”

It can be a great way to build serious equity up front, as well as take care of most of the “cap ex” expenses before the property is ever rented out. And, of course, nice houses tend to attract nice people.

However, it can be tough to calculate the value of those improvements on a “return on investment” level.

For example, you might buy a fixer-upper property and build $50,000 of equity into the deal — but not get the greatest cash flow because of that.

Does that mean the deal is bad?

Not necessarily. Your total return on investment is based on more than just cash flow — it’s also based on any appreciation you get (whether “forced” or “natural”) and the loan being paid down over time. I’m not suggesting you buy a bad deal just because you think appreciation is going to increase. However, it can be helpful to look at more than just the cash on cash return.

Let me give you a quick example:

Let’s say you bought a house for $100,000. You put 20% down ($20,000), paid $5,000 in closing costs, and spent $50,000 of your cash rehabbing the property. So, you’ve now spent $75,000 of your money on this property. Now, let’s say that the property produces $4,000 per year in “cash flow” for you, after all the expenses have been paid. Therefore, you could say that your “Cash on Cash Return” is 5.3% because $4,000 / $75,000 = .0533.

After all, what if, after the property was fixed up, it’s now worth $300,000? That changes things a bit, doesn’t it? What if it’s worth $500,000? Or $1,000,000? Yes, that’s probably absurd, but it illustrates a point: Cash on cash return isn’t everything, especially when you are dealing with fixer-upper rentals.

Furthermore, let’s say that you rented that same property out to some tenants for 10 years and then sold it. During that time, the value went from our original $300,000 all the way to $400,000 — but the loan that we had for $80,000 was paid down to $65,000. We now have a pretty massive amount of equity in this deal — over $300,000! BUT we still might only be getting that 5.3% cash on cash return if rents did not increase. Someone who ONLY looks at cash-on-cash return might never have purchased that property because it didn’t meet their cash-on-cash return requirement. And they would have missed out on potentially $300,000 in profit.

Introducing: “The Annualized Total Return”

This is why BiggerPockets just introduced the “Annualized Total Return” option on the Rental Property Calculator. This simple change has made it easier for you to include any appreciation (forced and natural) that you might receive on the property AND the loan principal being paid off over time.

When running a calculation on the Rental Property Calculator, you’ll now see an option on the bottom of the third page that asks for the “Sales Expenses.” This is the percent of the total sales price that would be required to pay if you sold the property. Essentially, this number is the closing costs you would pay when you sold the property, including agent commissions. I typically use 9% or 10%, knowing that in my area, agents typically keep 6% of the sales price, my county keeps 1.5%, and the title company gets another few thousand dollars.

That’s probably the response most people had when they read the title to this post. Retire in three years? Sure, maybe if the person was 99.9 percent of the way there. But there’s no way the average person could retire in just three years using real estate… is there?

Well, that’s the question I was asked at last week’s weekly BiggerPockets real estate investing webinar — and I took on the challenge. Here’s the gist of how I answered.

(By the way, did you know that every week I host a free online webinar to teach folks about various real estate topics? We’ve talked about how to invest while working a full-time job, how to invest using no money of your own, how to use fixer-upper rentals to make six figures, and so much more. Sign up for the next free webinar by going to www.BiggerPockets.com/webinar. This week we’ll be talking about How to Use BiggerPockets to Become a Rockstar Real Estate Investor. It’ll be awesome!)

OK, let’s get on with this discussion, because you’ve got three years until retirement and time is ticking. Here we go.

Let’s Make Some Assumptions About Retiring in Three Years

First of all, let’s make a few assumptions because I don’t really know anything about you.

I’m going to assume that you don’t need six figures to retire.

We’re not talking about buying a yacht, drinking Cristal, and swimming in cash like Uncle Scrooge. We’re talking about retirement — being able to pay your bills with passive income. So, for today’s assumption, we’re going to use $54,000 per year, or $4,500 per month.

Now, if you need more than that, that’s OK — keep listening and you can adjust these numbers on your own later.

So, we now have a concrete goal of making $4,500 per month in cash flow from real estate within three years.

I’m a strong believer in turning lofty, undefined goals (like “I want to retire”) into tangible, specific goals (like “I want $4,500 per month in cash flow from rental properties within three years”). Now that is something we can go after.

Breaking Down the Big Goal Into the # of Units

Now that we have our big goal clearly defined — $4,500 per month within three years — we need to break that down even further. What does that even mean?

Well, for me, I like to look at that number and ask the question, “How many rental units (houses or apartment units) do I need to hit that number?”

Of course, that’s going to depend on the deal. A lot of people buy real estate, and they lose money every month. We don’t want that. We want to buy real estate that is cash flow positive. That means that after all the income has been received and all of the expenses have been spent (and I do mean ALL of them, including vacancy, repairs, CapEx, management, utilities, the mortgage, and more), we should have a positive number.

How positive?

For me, I like to see between $100 and $200 per month, per unit. That’s just my target that I aim for and have been able to get most of my career.

So let’s use a number smack dab in the middle of that: $150 per month, per unit in cash flow.

So, to all the math geniuses out there, let me ask you a question:

If you needed $4,500 per month in cash flow and each unit gave you $150 per month in cash flow, how many units do you need?

Anyone? Anyone?

Bueller?

Bueller?

Right! Thirty units.

So, now we’ve taken this big crazy goal of retiring in three years and condensed it down to a goal of buying 30 units that average $150 per month in cash flow each.

Now we’re getting somewhere — but we’re not done yet!

We need to make a plan to get those 30 units.

Making Your Plan Toward Retirement

So, how do you buy 30 units over the next three years? Well, of course, you could shop around and find a 30-unit apartment complex, and BAM, you are done.

But that would make for a slightly boring video, so let’s get a bit more creative.

You could also buy 30 single family houses, but that’s a lot of work — so let’s work on a plan that meets somewhere in the middle — small multifamily properties like duplexes, triplexes, or fourplexes.

Additionally, I want to break up our goal of 30 units into three mini-goals, one for each year.

We could say that we want 10 units per year for three years — but I don’t think that’s as realistic. I say that because people tend to start a little slower and speed up over time. So I want to set our goals to reflect that reality.

So rather than 10 units per year for three years, let’s set a goal of buying just five units the first year, 10 units the second year, and 15 units the third year.Related:How Much Do I Need to Retire?

So, we’ve taken this big, lofty goal of “I want to retire in three years” and now, to be on track to hit that, we just need to buy five units this year. Think you could manage that over the next 12 months? I don’t see why not.

But plans are useless without action — so the final step in this goal of retiring in three years is to take the action required to meet your goal each year.

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